Hyperinflation

Although we waxed skeptical here the other day about Warren Buffett’s just-announced $5 billion stake in Bank of America, we allowed for the possibility that the deal will provide a handsome payoff to him no matter what happens to the bank.  B of A could implode, after all, a victim of sinking collateral values for its mortgage loans, and of litigation over its securitized-lending business.  There is also the wild card of homeowners challenging lenders in court to show clear title to properties that are in line for foreclosure. In fact, this issue alone has the ability to capsize the global financial system, since “clear title” is exactly what ceased to exist when the feather merchants of the banking world leveraged out real estate to-the-max earlier in the decade to create an $800 trillion derivatives edifice – the Mother Lode of Digital Money, as it were. All of that sum must be viewed at the moment as deflationary overhang, by the way – not to mention, a key stumbling point for those who argue that The Great Economic Crisis must eventually precipitate out as hyperinflation. So, how do you produce even mild inflation, let alone hyperinflation, with the housing market in a full-blown Depression?  Most surely not by expanding the capacity of banks to make mortgage loans. That’s been tried to death – first moderately, then aggressively, and finally desperately -- with zero success. Despite trillions of dollars worth of mortgage stimulus and supports both implied and real, the residential market looks even grimmer than it did a few years ago.  Existing-home sales fell 3.5 percent in July despite the fact that prices were 4.4 percent lower than in July 2010. Now that’s deflation. There’s also the $6.6 trillion loss of home equity that has occurred since the onset of the

FOFOA blogspot has taken pains to lay out the most cogent, exquisitely nuanced and, ultimately, persuasive argument for hyperinflation that I have read to date.  You can access it by clicking here.  I've responded as follows but plan to write later, in agreement, at greater length. Sheesh!  Where to begin?  It's difficult to give up a belief system that took root 30 years ago, but I find your arguments irresistible.  I took notes as I read the essay, thinking to rebut you point-by-point; instead, halfway through it I found myself overwhelmed by the clarity of your thoughts.  The real power of this essay is that each step of the hyperinflationary endgame you foresee is entirely consistent with human nature, particularly where self-interest and self-preservation are fated to play out. I will need to find a way to break this gently to my readers, perhaps starting with the old joke you've mentioned about not having to outrun the bear.  It goes a long way toward explaining how the Masters of the Universe will actually benefit from hyperinflation. You've also helped me understand how I could have been so bullish on gold over the years even though I considered myself a hard-core deflationist. It was a conflict between head and heart, really, but you’ve resolved it with the most persuasive argument I’ve seen in favor of gold. Even better, you’ve provided a sound basis for arguing that at $1500 per oz., gold has barely begun to discount the dollar’s final fall. I especially appreciate the patience and humility you showed in walking readers through your argument one gentle step at a time. By not trying to overpower your opponents, you have produced a treatise that is certain to engage many minds.  Thanks for engaging mine -- at a depth that had eluded

Gotta love those inflationists!  We enjoy getting in their faces now and then because their nutty ideas, particularly that inflation is worth worrying about at the moment, can only confuse and misdirect people who are struggling to sort out the facts for themselves. Imagine waiting…and waiting…and waiting for inflation to “break out,” as the inflationists have been doing all too patiently since 1991.  That’s when the Fed put pedal to the metal to escape the drag of recession. At the time, virtually every monetarist in the land was predicting that a nasty inflationary spiral lay just ahead. All we got in the end was the kind of inflation that no one noticed, let alone complained about: asset inflation. Greenspan sealed his reputation as a bubblehead forever by finally noticing the bubble, although, to his further discredit, he was only explaining at the time that no one with a trained eye who was watching for a bubble could be faulted for having failed to see one.   And now, finally, deflation is overpowering the myth of monetarism itself – the myth that the Fed can fine-tune economic cycles by creating “money” out of thin air.  Turns out it’s not so easy. In reality, the banking system’s feather merchants succeeded only in building, one nearly indiscernible layer at a time, a debt juggernaut that can no longer be controlled, let alone reversed. Deflation has suffocated the monetarists and is about to do in the Keynesians for good measure. It is also continuing to tighten its grip on just about anything that can be bought or sold.  We’ll say more about that in a moment, even after conceding up front that inflation eventually is going to be a huge concern, since an outright hyperinflation will be needed to wipe hundreds of trillions of dollars’

Here is a link to video from my appearance on Max Keiser's On The Edge, where we talked about market making, high frequency trading, flash crashes, deflation and hyperinflation.

We backed off the inflation/deflation debate a few months ago when we started feeling sorry for the inflationists, who seemed hopelessly out of touch with the real world.  As far as we were concerned there was nothing to debate, since, other than what we’ve referred to as grocery-store inflation, no evidence existed that prices were about to rise, let alone explode. That is still true.  What on earth could they have been thinking? It should have been clear enough that the monetarists needed to revamp their outmoded theories after rampant easing in the wake of the S&L debacle 20 years ago failed to generate any meaningful inflation at the consumer level. What we got instead was a new strain of “good” inflation that seemed to benefit everyone.  Indeed, few complaints were heard from homeowners whose properties were increasing in value by 15% or more per year, nor were financiers whining about the soaring collateral values that made it possible for them to leverage $60 trillion worth of global GDP into a derivatives edifice with a notional value exceeding $600 trillion. And now we’ve got the “bad” kind of deflation, with a moribund housing market that has so far failed to respond to trillions of dollars worth of intended stimulus, either direct or indirect. Freddie Mac, for one, has nearly tripled its book, filling the shoes of all the profligate subprime lenders who nearly took the financial system down a couple of years ago. Thus, rather than gearing the mortgage market toward precipitous failure, the government has been dribbling out subsidies of $10 billion to $15 billion to the GSEs each quarter that we hardly even notice any more. Hyperinflation, But Too Late… We’ve made this point a hundred times, but we will make it again:  Hyperinflation is coming, for sure,